Panels are ~50% more efficient than SolarCity's current supplier's, a third better than the market leader

SolarCity Corp. (SCTY), America's largest solar power systems firm, made a bold step forward this week into the realm of panel manufacturing, announcing it has come to terms to acquire top startup Silevo, Inc. If SolarCity can make good on Silevo's bold claims, which both it and national laboratory scientists claim are as good as they sound, it could be sitting on a veritable gold mine.

Aside from its dominant market position, SolarCity is perhaps best known for its iconic top investor -- Elon Musk. After cofounding X.com, which became PayPal in 2000, Mr. Musk cashed out in 2002 via the firm's $1.5B USD sale to eBay, Inc. (EBAY).

By contrast to SpaceX and Tesla, SolarCity is more of a side project for Mr. Musk, but one that he's passionate about. His holdings are not publicly disclosed, but as Chairman of the board he's thought to be the solar power firm's largest shareholder. A 2012 report by Bloomberg suggested that Mr. Musk owns a quarter (25 percent) of SolarCity shares, although that figure may have changed.

Elon Musk serves as chairman of SolarCity. [Image Source: AP]

Needless to say, even in sparing quantities, Mr. Musk's tireless optimism, intuition, and vision has been a great asset to the solar firm.

II. Silevo -- Aiming to be the Best Commercial Cell

Silevo was founded in 2007 by a pair of Silicon Valley veterans -- Zheng Xu, Ph.D and Dr. Jianming Fu, Ph.D. Mr. Xu started his career at Toshiba Corp.'s (TYO:6502) cutting edge thin film solar division in the late 1980s. He then founded his own firm -- Sierra Solar Power, Inc. -- in the early 90s. However, he was wooed away by coating, display, and semiconductor giant Applied Materials, Inc. (AMAT) -- where he worked from 1992-2007.

It was at Applied Materials that Mr. Fu -- a fellow executive -- formed a strong working partnership with Mr. Xu. While he had worked at Applied Materials, Mr. Xu had kept Sierra Solar active. Based out of Fremont, Calif., it bought and installed panels at homes in the region. But Mr. Xu wanted to make panels of his own.

In 2007 he and Mr. Fu left Applied materials and spun Sierra Solar into a stealth startup. On the name -- which resembles a certain conservationist organization -- Silevo's business VP Chris Beitel comments, "It was born Sierra Solar Power, and we didn't really have any ties to the Sierras, even though they imply a green environment."

Naming aside, the startup kept a low profile from 2007 to 2011, when it felt its technology sufficiently mature and patent protected to publicize its work. In 2011 it had $33M USD in seed money. The next year it raised $55M USD and moved to China, where it built a 30 MW (of annual panel production capacity) plant, located in Hangzhou, China.

III. Silevo's Triumphant Return to American Production has Been a Long Time Coming

But while it jump an ocean away, its roots lingered in the U.S.

VP Chris Beitel in 2012 said an American return might be possible, stating:

We absolutely did an intense assessment of all the various options—we looked at California, Oregon, and Arizona. [Locating in China is] a commitment that we have for phase one. When we look to expand to a phase two, we will certainly look into our options.

For us, it’s very important to have the right cost ratio. We do that two ways—one is through the operation strategy, and the second is through our fundamental product. The manufacturing strategy was a difficult decision, but if you look at other peers, like Intel or Apple, all of their manufacturing has been done offshore in China. We thought this was the appropriate stage for us moving forward.

Silevo's temporary exodus to Chinese production was merely one step on its ambitious and well-thought-out roadmap. [Image Source: Silevo]

The pilot plant was a convincing success. In 2013, Silevo announced a key technical milestone -- its near-commercial 125 x 125 mm (4.9 x 4.9 in.) shingles achieved a whopping 22.1 percent efficiency in Sandia National Labs tests, within 0.5 percent of the record for any silicon cell and in the top three of lab-certified cell efficiencies. That's a great result for a long-shot R&D firm, but the fact that Silevo was nearing production readiness was eye opening.

The key to Silevo's success, and why it kept under wraps so long is its clever technology, for which it holds over 300 patents.

Silevo's cells use a technique called tunneling oxide junctions (n-type silicon), which is often used in electronics, but was widely considered a dead end in the solar power business. Most solar power makers use p-type silicon, as it's easy to work with.

Silevo is on a different road than most other PV panelmakers. [Image Source: Silevo]

Silevo has achieved far better results that past n-type crystalline silicon tunneling oxide coated cells, thanks to a couple tricks. First it operates at a higher voltage, allowing it to escape some of the format's problems. Second, it uses a patented, proprietary cell architecture to "improve cell defect or interface trap density (Dit)", according to its company website.

These tricks have Silevo on target to achieve its near term goal of 24 percent panel efficiency.

IV. Already at the Top of the Market in Efficiency

Silevo also enjoys a couple of other advantages. Thanks to its novel architecture, its cells can ditch the silver paste and use copper electrodes instead. This not only saves money, but is also easier to scale to larger cell sizes and reduces the silver paste's shading effects, which hurt efficiency in p-type cells. It also has a relatively simple six step semiconductor fabrication process to make the panels -- an art not that far removed from the CPU-wafer fabrication of Intel Corp. (INTC) and its peers.

SolarCity's current primary supplier -- Kyocera Corp. (TYO:6971) -- was last year offering up efficiencies of 14.74 percent with p-type traditional silicon tile panels. Costs remained high and product laborious, as the p-type panels typically require silicon paste electrodes on one side. SunPower Corp. (SPWR) and the Panasonic Corp. (TYO:6752)/Sanyo Denki Comp., Ltd. (TYO:6516) joint venture saw efficiency of around 17.6, the highest among top commercial producers.

200 and 220 watt commercial panels available in 2013 topped out at around 17.7 percent efficiency. [Image Source: SRoeCo Solar]

Silevo's panels, if it can scale them up to full production, could be more than a third more efficient than the next closest competitor, and more roughly 50 percent more efficient than the Kyocera panels that SunPower typically buys. Of course that is assuming that Silevo's claims of better efficiency scaling in p-type cells hold true. Silevo's current production efficiencies of around 17.6 percent -- on par with top p-type cells, but not necessarily better.

In case studies in the Netherlands, Silevo showed that its 295 Wp Silevo T-Series (17.6 percent efficient) last year outperformed a 245 Wp standard crystalline cell -- similar to SolarCity's bread and butter -- by near a quarter, producing 23.5 percent more power over the course of a year (9.9 MWh vs. 8.03 MWh).

V. Elon Musk Promises Solar Gigafactory in Two Years

Given Mr. Musk's involvement, you might guess what's coming next -- an American solar gigafactory.

A 2013 slide deck showed Silevo was hoping to build a 230 MW capacity plant in the U.S. or China by the end of 2014. While it is unclear whether it will make that mark, Silevo and its new owner have an even more ambitious plan -- a 1 Gigawatt "Gigafactory" in the vein of Tesla Motors' upcoming $5B USD Southeast U.S. battery Gigafactory, which will be located in Arizona, Nevada, New Mexico, or Texas (with an announcement of which forthcoming later this month).

Silevo, SolarCity, and its chairman Elon Musk are planning a gigafactory to blanket the U.S. with record-setting solar panels. [Image Source: Silevo]

The SolarCity/Silevo solar gigafactory will be located in New York State and will ramp up to 1 Gigawatt of annual production within two years, according to Mr. Musk. At the announcement of the Silevo purchase, he cheered:

Our intent is to combine what we believe is fundamentally the best photovoltaic technology with massive economies of scale to achieve a breakthrough in the cost of solar power.

SolarCity was founded to accelerate mass adoption of sustainable energy. The sun, that highly convenient and free fusion reactor in the sky, radiates more energy to the Earth in a few hours than the entire human population consumes from all sources in a year.

This means that solar panels, paired with batteries to enable power at night, can produce several orders of magnitude more electricity than is consumed by the entirety of human civilization. A cogent assessment of sustainable energy potential from various sources is described well in this Sandia paper.

Even if the solar industry were only to generate 40 percent of the world’s electricity with photovoltaics by 2040, that would mean installing more than 400 GW of solar capacity per year for the next 25 years.

We absolutely believe that solar power can and will become the world’s predominant source of energy within our lifetimes, but there are obviously a lot of panels that have to be manufactured and installed in order for that to happen. The plans we are announcing today, while substantial compared to current industry, are small in that context.

SolarCity shareholders are clearly optimistic about the plan. Shares surged 17.5 percent at close, according to Forbes, following the announcement.

Maybe Elon Musk will use the stellar cells in his bid to colonize Mars.
[Image Source: Art Streiber/August Image]

Who knows -- maybe we'll see some Triex solar cells powering Mr. Musk's Mars colony in the next few decades. You know what's in the back of his mind.